In 2004, only the second quarter — for which Pensions & Investments calculated $14.8 billion in hedge fund investments — saw higher numbers than 2005. By way of further comparison, the last six months of 2004 brought in $5.7 billion from 13 hires and 28 searches. In seven cases, the mandate size was not known.
P&I's tally of first-quarter 2005 institutional investment in hedge funds represented 24% of the industry's $24.6 billion in total net hedge fund inflows reported by hedge fund researcher Tremont Capital Management Inc., Rye, N.Y.
And for all of 2004, institutional investors committed $23.8 billion to hedge funds, by P&I's estimate, which accounted for about 19% of Tremont's estimated $123 billion of net flows into hedge funds that year.
Several large public plans are poised make substantial first investments in hedge funds:
• The New Jersey State Division of Investment, Trenton, is searching for a hedge fund consultant to advise on manager selection for an allocation for the state's $68 billion public employees' pension plan. The new consultant will eventually help hire firms to manage between $2.7 billion and $3.4 billion, or 4% to 5% of plan assets.
• The New Mexico State Investment Council, Santa Fe, increased its as-yet uncommitted hedge fund allocation to $500 million from $350 million, after a change in state law, which takes effect July 1, liberalized investments into alternatives. Trustees for the $12 billion council increased the hedge fund allocation to 12.5% from 10% and will likely choose from among 12 hedge funds of funds finalists in July.
• The $10.6 billion Illinois State Board of Investment, Chicago, is searching for between two and four hedge funds of funds to manage $530 million, or 5% of total assets. They hope to hire firms in August.
Several big hirings in the asset class were made so far this year:
• The £5 billion ($9.5 billion) West Yorkshire Pension Fund, Bradford, England, hired five hedge fund-of-funds managers to run a total of $475 million: Arden Asset Management Inc., New York; Aurum Funds Management Ltd., Hamilton, Bermuda; Credit Agricole Alternative Investment Products Group, Chicago; Quellos Group, Seattle; and Signet Capital Management Ltd., London. The managers will be funded over the next three to four years.
• The $5.3 billion Wyoming Retirement System, Cheyenne, hired Pacific Investment Management Co., Newport Beach, Calif., to manage a $100 million absolute-return portfolio, said Thomas Mann, director.
• The $41 billion pension plan of Boeing Co., Chicago, hired Arden Asset Management Co., New York, as its third hedge fund-of-funds manager; Arden will manage $275 million for the firm. Boeing officials are searching for a fourth manager to handle a recent increase in the fund's hedge fund allocation to 3% of total assets from 2%.
• The $52 billion Pennsylvania Public School Employees' Retirement System, Harrisburg, committed $702 million to the Pasadena, Calif.-based First Quadrant LP's Global Macro commingled fund and $525 million to the San Francisco-based Barclays Global Investors' Ascent Global commingled fund. An additional $270 million was designated for an internally managed S&P 500 global macro overlay.
Despite hedge fund performance challenges in the first months of this year, institutional investors aren't slowing their investment pace, nor are they holding back on educating trustees about hedge funds and beginning searches, said David Harmston, head of client services at hedge fund consultant Albourne America LLC, San Francisco.
"It takes a long time for many institutional investors to actually make hedge fund investments. Sometimes, the due diligence process takes six months. It's quite hard for them to change direction, and their investments in hedge funds are less tactical than you might expect," Mr. Harmston said.
"It's a slow process to reach a comfort level for plan sponsors," Mr. Harmston said, noting that moving into even a 0.5% hedge fund allocation can be a big hurdle.